Regarding asset risk, which statement is true about its relative size for P&C versus life insurers?

• A. It is larger for P&C
• B. It is smaller for P&C due to shorter liability durations
• C. It is about the same for P&C and life
• D. It is not used for P&C

Answer: (B)

Asset risk is about how much an insurer’s net position could move if asset values swing relative to the timing and size of liabilities. Property and casualty insurers have mostly short-term, short-duration liabilities because claims are settled relatively quickly. That short duration means the present value of liabilities is less sensitive to long-term asset value swings and to shifts in interest rates, so the volatility in assets doesn’t translate as strongly into changes in the insurer’s net assets. Life insurers, on the other hand, have long-dated liabilities, so their present value is highly sensitive to interest-rate movements and asset value changes over a longer horizon. That creates a larger asset risk for life insurers. So the statement that asset risk is smaller for P&C due to shorter liability durations is the best description. Asset risk is still relevant for P&C; it’s just comparatively smaller than for life insurers.